Former Finance Minister Grant Robertson and former Prime Minister Chris Hipkins were dealing with requests from KiwiRail for more money right up until the general election. Photo / Mark Mitchell
The Government has released long-awaited documents behind the decision to cancel KiwiRail’s two Cook Strait mega ferries. They include tense letters between former Finance Minister Grant Robertson and KiwiRail chairman David McLean, revealing how Labour tried to deal with a problem National eventually sank.
KiwiRail had some bad news for former Finance Minister Grant Robertson in February 2023 - the budget for its mega ferry project had blown out by more than a billion dollars.
This was not the first time Robertson had dealt with such a request from KiwiRail. In 2021 the state-owned enterprise wanted an additional $565 million for the plan to replace its ageing Interislander fleet.
The Government deferred that request and established a contingency fund instead. It ended with a stern letter from a “disappointed” Robertson, who said significant risks regarding the project remained.
So, Robertson was not pleased when KiwiRail returned for more money early last year.
KiwiRail blamed the escalation on inflation, flood mitigation at Kaiwharawara where the Wellington terminal was to be built, and earthquake risks.
“We appreciate and accept that an increase in the total project value by $1.159 billion to $2.609b is a very significant expense, at a difficult time in the Government’s finances”, KiwiRail chairman David McLean and chief executive Peter Reidy said.
However, they said investing more money in the project was the only way forward.
“The Board apologises for the increase. We have strengthened the governance and oversight of this project to improve our confidence, and we hope yours, in its management and cost controls. We recognise this situation is far from ideal and we will conduct a thorough review of how this occurred.”
Robertson wrote a letter to McLean on March 29 and said ministers were surprised to receive a request for an additional $1.2b for the project.
“Particularly in light of your letter of 20 October 2022, which indicated that an additional $300m would be required as a worst-case scenario. As you would imagine a request of this magnitude has triggered a number of questions about the Crown support required for the project.”
Robertson wanted more information from KiwiRail on the cost and risk of alternative options to the mega ferries.
He specifically wanted to know: “The extent to which seeking to renegotiate the shipbuilding contract to procure ferries that are more like-for-like with respect to the current fleet and/or are not rail-enabled would allow for landside infrastructure costs to be reduced and forecast with greater certainty”.
McLean replied to Robertson on June 6 saying KiwiRail had considered three alternative options.
The option of three new medium rail-enabled ships was estimated to cost $3.02b, two new large ships which were not rail-enabled was $2.59b, and a “do minimum” scenario of procuring and running three second-hand ships was $1.34b, KiwiRail estimated.
All options, including retaining the mega ferries, were Net Present Value (NPV) negative, meaning the cost of capital exceeds the long-term revenues it enables. The mega ferries had the highest benefit-cost ratio of 3.3.
McLean argued the mega ferries remained the best option.
On July 12, Treasury and Ministry of Transport officials warned ministers the mega ferry project was still relatively early in its life, with detailed design work yet to be finalised and without contractually agreed costs.
They warned the final cost of the project could approach $4b.
They felt the project’s benefits were overestimated and recommended an independent quantity surveyor be brought in to report directly back to ministers and officials.
Officials noted the project could no longer be considered on a commercial basis because of its NPV, so the Government needed to give greater consideration to the public benefits of any further funding.
They recommended the Government support KiwiRail under the “do minimum” scenario with a further $200m.
Ministers mulled this over and wanted subsequent advice before meeting with KiwiRail bosses on August 1.
McLean wrote a letter to ministers after that meeting stressing the need for a decision by Cabinet that month.
Shareholding ministers then asked for a draft Cabinet paper to be drawn up so they could discuss options with their colleagues.
By September 14, a decision was yet to be made and McLean again wrote to ministers stressing the urgency of the situation.
“The project is now at a critical juncture – it is either ‘go’ or ‘no-go’ depending on whether the funding is available”, he said.
One way or the other, the decision was needed, McLean said.
Days later, Cabinet made an in-principle decision to increase the contingency fund by $750m to enable the operation of the mega ferries but reduce the project’s scope by staging non-essential terminal development.
Robertson wrote to McLean informing him of the decision and described it as the most viable option for the Crown.
He said the significant cost increase required ministers to reconsider all potential options, particularly in the context of current capital constraints and other calls on Crown funding, to determine the most appropriate response for New Zealand.
“We note that KiwiRail under-scoped the landside infrastructure in 2021 meaning the decision to procure two large rail-enabled ships at that time was premature. To date, we are yet to see a satisfactory explanation for why this was the case,” Robertson said.
“It took some time to receive adequate information to enable a full review to be undertaken. While we appreciate you working with officials on this, we are disappointed at how challenging this process has been.
“We were surprised that the terms of delivery in the vessel purchase contract were renegotiated at a time when the future funding of this project was under active consideration by the Government.”
McLean replied to Robertson and said the board was considering Cabinet’s decision with urgency and had not yet formed a view about whether the project could proceed with that amount of money, claiming the minimum required was $950m.
He expressed concern about the extra money being part of the contingency fund, meaning the full amount may not be relied on.
McLean hit back at the disappointment Robertson had conveyed in his letter.
“We have provided substantial information on the case for proceeding and the pitfalls of alternative options to officials and their consultants, often re-answering the same questions while months have passed on a time-critical proposition,” McLean said.
“The ferry purchase contract amendment secures a six-month postponement to delivery dates at no cost to KiwiRail. This was necessary because the delays in securing funding have impacted the critical path and mean the landslide infrastructure would not be ready before the ships arrive.”
By September 28, McLean’s tone had softened in another letter to ministers.
The board had instructed management to advise on the deliverability and risks of de-scoping and deferring elements of the terminal infrastructure, McLean said.
“While we remain firmly of the view that this is not a workable option in the medium-long term, there may be ways to progress the project in the short-medium term but to a suboptimal and lower standard.”
McLean requested Cabinet revoke two conditions of the extra funding - that the Government would seek to minimise the drawdown on the $750m contingency fund and that this funding may be provided as debt or with other conditions, instead of as equity or a capital grant.
These were material constraints, McLean said.
Robertson replied to both letters on October 3 and said that given the imminence of the general election, Cabinet was unable to take any further decisions on the project.
He confirmed the full amount of money in the contingency fund was available to KiwiRail should this be deemed necessary.
Robertson suggested KiwiRail consider all credible options for how it could proceed with the additional funding Cabinet had agreed to, including renegotiating the ship-building contract with Hyundai Mipo Dockyard.
KiwiRail deputy chairwoman Sue McCormack replied on October 13, essentially saying they were working on it but that KiwiRail needed $145m urgently for construction contracts to buy them time until a solution was found.
The general election was held the next day, bringing a change of Government.
Nicola Willis was informed of the new $2.6b cost for the mega ferries during coalition negotiations and before she was sworn in as Finance Minister.
She received written briefings from KiwiRail regarding the iReX project on November 30 and met McLean and Reidy again later that evening.
By then, the cost of the project had escalated to $3b.
On December 13, Willis issued a statement saying the Government had declined KiwiRail’s request for an extra $1.47b for portside infrastructure.
“Ministers do not have confidence that there will not be further increases and are concerned about the continued significant cost blow-outs.”
The project was scuppered.
Georgina Campbell is a Wellington-based reporter who has a particular interest in local government, transport, and seismic issues. She joined the Herald in 2019 after working as a broadcast journalist.
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